- XAU/USD drops to $2,646 after September inflation data suggests progress toward the Fed’s 2% target.
- US 10-year Treasury yield falls five basis points, while the US Dollar Index dips by 0.16% to 100.41.
- Geopolitical risks rise as Israel strikes Lebanon, but Gold fails to gain momentum as traders cash in profits.
Gold fell to a three-day low beneath $2,650 after the US Bureau of Economic Analysis (BEA) revealed that September inflation continued to evolve toward the Federal Reserve’s (Fed) goal. Even though this warranted further easing by the Fed, the golden metal failed to gain traction as analysts speculated that traders were booking profits. The XAU/USD trades at $2,657, down by almost 0.50%.
Earlier, the BEA revealed that the Fed’s preferred inflation gauge, the Personal Consumption Expenditures Price Index (PCE), is slightly closer to the central bank’s 2% target, according to August’s data. Meanwhile, core PCE increased by a tenth of a percentage point compared to July’s data.
Following the data, the US 10-year Treasury note yield fell five basis points to 3.749%. Consequently, the Greenback dropped as the US Dollar Index (DXY) slumped 0.16% to 100.41.
After the data, the odds of 50 basis points (bps) of easing at the November meeting increased, according to the CME FedWatch Tool.
Given the market’s reaction, it was expected that Gold prices might be set for another record high. Nevertheless, the XAU/USD plummeted below the September 26 daily low of $2,654, opening the door for a deeper pullback.
Other data revealed that the University of Michigan Consumer Sentiment for September improved in its final reading.
Aside from this, an escalation in the Middle East conflict between Israel and Hezbollah looms. Israel claimed that it hit Hezbollah’s main headquarters in southern Beirut on Friday.An Israeli official said the government hopes not to proceed with a ground invasion of Lebanon but would not rule it out.
Reuters revealed that Gold ETFs saw modest net inflows last week and have yet to fully contribute to Gold’s rally, though analysts expect more activity from ETFs in coming months.
Daily digest market movers: Gold price tumbles as US inflation approaches 2% goal
- August US PCE came in at 2.2% YoY, down from 2.5% a month earlier and slightly lower than the consensus estimate.
- Core PCE increased modestly as expected from 2.6% to 2.7% YoY for the same period.
- The University of Michigan (UoM) Consumer Sentiment for September improved from 69.0 to 70.1. Inflation expectations for one year dipped from 2.8% to 2.7%, while five-year expectations rose from 3% to 3.1%.
- Market participants have fully priced in at least a 25 bps rate cut by the Fed. However, the odds of a 50 bps cut have decreased to 54.7%, down from a 60% chance two days ago, according to the CME FedWatch Tool.
XAU/USD technical analysis: Gold price slumps and hovers around $2,650
Gold price hit an all-time high of $2,685 and remains upwardly biased. However, buyers were unable to hit new record highs, opening the door for a pullback. Short-term momentum favors sellers as the Relative Strength Index (RSI) exits from overbought territory, aiming toward the 60 mark.
If XAU/USD drops below $2,650, look for a test of the September 18 daily high at $2,600. The following key support levels to test will be the September 18 low of $2,546, followed by the 50-day Simple Moving Average (SMA) at $2,488.
Conversely, If XAU/USD extends its rally past the current year-to-date (YTD) peak of $2,685, the next resistance would be the $2,700 mark. Up next would be the $2,750 level, followed by $2,800.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
